Tax Implications of Debt Forgiveness
As the real estate values have plummeted, a lot of Americans are in upside down real estate and some simply can’t hang on any longer. You might be in the same spot - looking at foreclosure, considering a short sale or exploring a loan modification. I’ve had clients successfully renegotiate their loans, actually for some pretty amazing amounts (as much as $200,000 in debt reduction and 3% with a 40 year amortization).
If you’re looking at any of these options, get as many facts as possible first.
One of the things to consider in any of these is what happens to the excess debt. For example, if you have a loan on your property of $400,000 and it’s only worth $250,000 now and the company either allows a short sale or a principal reduction to that amount, there is $150,000 still to figure out what to do with. In some cases, the company isn’t allowed to come after you for the debt. (That’s called getting a deficiency judgment.) In many cases, though, people thing they’re exempted and they’re not. In fact, under most state law the lender has up to 4 years to file against you.
If instead, they forgive the debt (which is most likely what you are hoping for), you have a taxable event. If it was your principal residence and the debt is only acquisition indebtedness you will get a pass. Otherwise, it’s taxable.
If you’ve had a foreclosure, deed in lieu of foreclosure, short sale or loan modification, don’t forget possible tax implications. There is a way around it - a Form 982 filing with your tax return - but you must file it with your return!
Delicious
Digg
Reddit
TechnoratiTrackback URL for this post:
- Diane Kennedy's blog
- Sign in to post comments
- Email this page
Diane, thank you for stressing that Form 982 must be filed with the tax return. This is so critical - this is a “use it or lose it” form that can’t be filed late or on what we would consider a “normal” (3-year window) amended return. The return must be filed on time (including extensions) and if you forget the form you MIGHT be able to recover with an amended return, but only if you qualify for a special IRS procedure that allows a 6-month window after the original return was filed. So if you (or your tax preparer) forget the form you very likely might pay tax on the forgiven debt!
Great info -finally! But need help -pls. I bought condo in Las Vegas in June ‘05 and lived there until ‘06 -fun until life-threatening accident shook me up -so I returned to CA to stay with family. It was my principal residence but has been rented over 2 yrs now. Paid $120K and is now listed at $47K, as I was told by lender that property must be listed for 90 days before Deed In Lieu of Foreclosure could be considered and those are the unbelievable comps. There’s 2 mortgages -as it was a 80/20 Loan and all is ‘acquisition indebtedness’. After 7 weeks -no offers yet -so if it does go into a Short Sale OR they take back the deed OR foreclose -will I qualify for no 1099 Debt Forgiveness tax? Should I try to move back and reestablish residency to get that tax break? (I’m 78 and probably ‘insolvent’ -on top of it all) But -other than that -Life is Good! (whistling pass the graveyard?) Thanks!
You will qualify for the exclusion as is. Remember that you need to file a Form 928 with your return in the year that you give up the property.
Helo Diane:
In 2005 I helped a friend from forclosure by purchasing his home 210,000:( it was an intrest only loan) My tax advisor stated that since I already own a home I should not claim this home on my taxes in 2007. In 2008 I sold the home as a short sale 158,000. 30,000 of the loss I have to pay back as no intrest loan over a 30 year period. the other 23,000 I recieved a 1099c. if or to make matters worse, my so called friend claimed the intrest on his taxes for 2008, 2007. Do I have any recourse with the IRS to minimize what I might have to pay.
I am intrigued by this. Everything I have read suggests I will owe taxes on a short sale. I recently sold my home for $151, 00. I paid off the first mortgage of $121,000 and the second took a short sale. I owed $45,000 on the second. I agreed to pay 8,000 interest free over 8 years which leaves a balance of $12,000 that was forgiven. This was my primary residence. Your blog seems to suggest that I can avoid the tax on the $12,000 by filing this form. Am I correct in my situation? Thank you for your help.
Steve
Steve - you might qualify! How cool would that be?
Did you listen to my teleseminar on this 10/10? If not, you might want to go over to USTaxAid.com and listen to it.
I go into detail on the strategies for getting the tax-free debt forgiveness on your principal residence.
In a quick nutshell:
Thanks for the info Diane. I went to your website and could not find a listing for that teleseminar. Where can I find it? Thanks again!
Steve
Hi Diane, We bought a house 12 years ago and lived there until 2003. I was then forced into a job transfer. We bought a second house in my new job’s location. We had the first house on the “depressed” market since 2003, and had to settle for a short sale in 2009. I just recieved a form 1099-c from my mortgage company stating the amount of debt cancelled is $67,488.05. The fair market value of the house was $62,000. Box 5 asks if the borrower is personally liable for the repayment of the debt and the NO box is checked. What does this mean? WiIl I have to pay taxes on the $67488.05?
Great question! I’ve moved the question and answer over to the forums at http://www.usataxaid.com The forums over there are open, and free.